Hey, is there a difference between credit trading and rates trading?
I thought they are both just trading bonds?
Thanks a lot!
Rates Trading vs. Credit Trading?
At a broad level, rates trading has a macro-economic focus looking at economies and interest rates. Credit trading has a micro-economic focus and looks at specific debt securities such as corporate bonds.
What is Rates Trading?
Interest Rates Trading revolves around more macro credit products such as government bonds and interest rate swap products. Threse roles will be heavily focused on the yield curve, inflation in different geographies, and monetary policy.
What is an Interest Rate Swap?
An interest rate swap is an agreement between two parties to exchange interest payments to create a marginally lower interest rate payment on both sides. This usually involves exchanging fixed vs. floating interest rates.
What is Credit Trading?
As previously mentioned, Credit Trading is more based on micro analysis such corporate bonds and credit default swaps.
What is a Credit Default Swap?
A credit default swap transfers the credit exposure of a fixed income product between parties. The buyer of the swap makes payments to the seller. This acts like an insurance in the event of a negative credit event - such as default - at which point the seller will pay the buyer a premium.
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